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Q: I purchased a home in a court sale. I’m going through the closing and found out
that the owners can’t sell the house to me because of an IRS lien that should have been
removed.

The title company says its investigation shows that proper notice of the sale wasn’t given to
the IRS and that the court order wasn’t proper. The court says it can’t help me. What should I do
in this situation?

A: When a bank or other creditor forces the sale of a property, the creditor has
the ability to sell the property to satisfy the debt it is owed. Usually, the creditor — a mortgage
lender — has a first lien position on the property. That first lien position means that the lender
has the right to foreclose on the lien and wipe out all other junior creditors.

You should know that real-estate taxes are generally a lien that will be superior to the lien of
a mortgage lender.

However, the process requires the lien holder to notify each junior lienholder of its intention
to foreclose on the property and force the sale.

It’s the same situation with the IRS. If the IRS has a lien on the property, the IRS has the
right to be notified that a superior lienholder plans to foreclose on the property and sell it. If
it doesn’t get the required notice, the lien isn’t extinguished at the time of the sale.

Because you haven’t closed on the purchase, you should take the information that the title
company has given you to heart: You can take title to the home, but you might be responsible to pay
off the federal tax lien that the IRS has against the home. If the lien is $100, you might want to
take that risk, but if it’s $50,000, you might not.

The title company won’t ensure that when you buy the home, you will have clean title to it. If
you’re getting financing for the purchase of the home, you might have to put up money at closing
for one or two times the value of the IRS lien to get it closed. If you were subsequently able to
get the lien released, the title company would give you the money back. Otherwise, the money held
back might be used to pay off the lien.

You might be able to contact the IRS and work out a deal. If you can’t get anywhere with the
IRS, you might have to walk away from the purchase.